1.LAWMAKERS DISCUSS OUTCOME-BASED BUDGETING

Senators Wayne Niederhauser (R-Sandy/Draper) and Ben McAdams (D-Salt Lake County) responded to questions on October 6, 2010, presented by Paul Mero, president of Sutherland Institute. Addressing the topic of “Government Performance and Accountability: Outcome-Based Budgeting for Utah,” the event was the first of several Sutherland Legislative Briefings to be conducted prior to the 2011 general legislative session. This Briefing was hosted by Sutherland’s Center for Limited Government.

Sen. Niederhauser, the majority whip in the Utah State Senate, has been at the forefront of this issue and has spoken widely on the subject. He said now is the time for government agencies to start setting outcome goals in advance as opposed to “firing shots and drawing the target afterward.”

“Outcome-based budgeting is not a new concept,” Sen. Niederhauser said. “This has been a concept that has been discussed for probably decades, but has been looked at as the future. But the future is now. The future is present. Technology is going to allow us to, instead of focusing on inputs into government, focus on the results.”

Sen. McAdams cautioned against vying for bigger or smaller government in a partisan manner, but recommended a focus on “right-sized” government. He added that outcome-based budgeting on the state level could be a boon to legislators in helping Utah government to reach that right size.

“I’m happy to see Sen. Niederhauser taking this where it goes,” Sen. McAdams said. “I think it’s the right decision and the right discussion. I look forward to carrying this discussion further throughout the legislative session.”

You can listen to the Internet broadcast of this legislative briefing on the Sutherland Ustream channel at www.ustream.tv/recorded/10033174. A higher-quality video of the event will be released on the Institute’s YouTube channel at www.youtube.com/sutherlandinstitute on Friday.

2.OCTOBER 13: CONCLUDING TRANSCEND SERIES SESSION

On Wednesday, October 13, Sutherland Institute will team with The Heritage Foundation to host the third session of its award-winning Transcend Series:

Sutherland President Paul Mero will join with The Heritage Foundation’s Matthew Spalding and Michael Franc to facilitate a discussion on the topic. Mr. Mero will begin by addressing thecontext of principle-based governance within a conservative intellectual framework. Mr. Spalding will address its meaning and constitutional basis. Mr. Franc will explain how such governance looks in practice.

Mr. Spalding connects the principles of America’s founding with today’s thorniest issues as director of the B. Kenneth Simon Center for American Studies at The Heritage Foundation. Mr. Franc, vice-president of legislative affairs, leads a Heritage team that helps members of Congress understand and defend conservative principles in exercising their constitutional powers to approve budgets, make laws and oversee government operations.

Following check-in and seating at 8:30 a.m., the session will begin at 9:00 a.m. and conclude at 3:00 p.m. The venue will be the Sutherland Institute Conference Room, located in the Crane Building, 307 West 200 South, Suite 5005, in downtown Salt Lake City.

There is no charge for this event and limited free parking is available in the Crane Building’s south parking lot, along the adjacent streets. Pay parking is located in the lot immediately south of the building ($5 for the day). Light snacks will be provided. There will be a lunch break on your own at one of the many nearby restaurants.

Because seating is reserved, please register by sending an email to si@sutherlandinstitute.org or calling our office at 801-355-1272.

3.PERIODIC PROPERTY ASSESSMENT: END IT, DON’T MEND IT

by John Merrifield

Periodically appraising or assessing residential property values – the basis for Utah’s current property tax system – is a process with significant costs and only imagined benefits. A 2000 Utah Foundation study titled Financing Government in Utah – A Historical Perspective noted that, despite decades of appraisal process revision, similar properties received widely different assessed values. Further, Utah’s Truth in Taxation policy eliminates the need to maintain high levels of taxable value to avoid property tax increases – another supposed benefit of a periodic reappraisal (PR) system. Outside of eliminating property taxes altogether, the alternative to PR is pegging the assessed value to the purchase price adjusted for inflation, often called the acquisition value (AV) approach.

Evidence from California, Oregon, and to a lesser extent, Florida, shows that the benefits of PR have been overestimated. Policymakers in those states, like almost everyone else, assumed that doing away with the PR system would reduce property tax revenue. However, those leaders chose to do so anyway because of the PR system’s significant disadvantages. Despite the expected fiscal impact, policymakers in California and Oregon ended PR because local governments refused to offset rising property values with lower property tax rates, and the subsequent leap in property taxes forced some out of their homes and threatened others with the same fate. These threats motivated the adoption of AV in California through Proposition 13 (1978) and Measure 50 in Oregon (1998).

In Utah, under the state’s Truth in Taxation policy, local elected officials must vote to increase property tax revenue beyond that created by new growth. In other words, when average property values in a county increase, Truth in Taxation decreases average property tax rates to keep countywide property tax revenue level, before new growth is added in. Unfortunately, since property values increase more than average in some areas of a county and less than average in others, even with Truth in Taxation some Utahns are threatened with eviction from their homes because their higher property values increase their property tax burdens. Abandoning a PR system in favor of an AV system would eliminate these threats to ownership that result when a particular neighborhood suddenly becomes especially popular. Under PR, on the other hand, the longtime residents of such neighborhoods would see their property tax burden rise without any compensating increase in public services.

This is not the only property tax problem eliminated by an AV assessment system. An AV system would also do away with citizens’ concern about increasing their property tax burden by improving or renovating their home, which would likely lead to an above-average increase in the home’s value. Lastly, an AV system avoids the considerable administrative expense involved in the periodic reappraisal process.

One argument used by critics of an AV system is that a PR system is necessary to pursue equal taxation of properties of equal value. Under an AV system, the argument goes, in a neighborhood where homes appreciate much faster than average, new residents will owe more taxes than longtime residents in similar homes. In theory, a PR system can eliminate that inequity. But the 2000 Utah Foundation Study and others like it around the U.S. seem to show that, in practice, many significant inequities survive in a costly PR administrative process, which can also foster dishonest behavior. It is indeed bizarre to see homeowners bemoan appreciation and claim a low value at assessment protest hearings, only to demand a higher value when the time to sell comes.

Under an AV assessment system, equal taxation of properties of equal value can be achieved by deferring payment of taxes on above-average property appreciation until the time the property is sold. Until a homeowner sells the home, the increased value does not require the owner to bear a larger tax burden. This deferment of tax payments would not only solve the equality problem, but would eliminate what is perhaps the most unpopular aspect of property taxes: that the property tax burden changes irrespective of changes in citizens’ income.

Even if such equality problems could not be solved in an AV system, it is not clear that tilting the system in favor of infrequent movers, who tend to be low income, would be worse than the inequities that exist under a PR system. Both the U.S. and California supreme courts have ruled that AV is a legal basis for assessing property values despite such inequities. Regardless, “fair market value” of property as determined in a PR system remains a poor measure of ability to pay taxes, or the value to citizens of benefits received from local governments.

PR creates additional costs, risks, and injustices with few offsetting benefits, even in Utah with our Truth in Taxation policy. Given these realities, Utah should consider a move toward a property assessment system based on acquisition value.

Author John Merrifield, Ph.D., is a member of the economics faculty at the University of Texas at San Antonio and adjunct fellow of Sutherland Institute’s Center for Limited Government. He also serves as the editor of the Journal of School Choice and director of the E.G. West Institute for Effective Schooling. Dr. Merrifield has written several books, peer-reviewed journal articles, and book chapters in his primary teaching and research fields that include public finance.